What it means
The fee is the association's income. It funds insurance on shared structures, grounds maintenance, water and lighting in common areas, management fees, repairs and the contribution to the reserve fund for major future items.
It is set annually by the board when the budget is approved, and each owner's share is defined in the governing documents, usually equally or by unit size. What the fee covers varies enormously between developments.
A gated house scheme may charge $120 a month for road maintenance and landscaping alone, while a serviced apartment building with a concierge, lifts, a pool and buildings insurance can charge over $900. Comparing two fees without comparing what sits behind them is meaningless.
The fee also behaves differently from most household bills because it is effectively unlimited in principle. Owners cannot cancel it, and if costs rise sharply the association raises the charge or levies a special assessment, a one-off payment on top of the regular fee when reserves are short.
Its effect on borrowing capacity is the part buyers most often overlook. Mortgage lenders add the HOA fee to principal, interest, property taxes and insurance when testing the debt-to-income ratio, so a high fee reduces the loan available on exactly the same income.
Two identical houses at the same price are not equally affordable if one carries a $450 fee. For accounting purposes the fee is generally an operating cost of holding the property.
A landlord treats it as a deductible expense against rental income, while an owner-occupier normally cannot deduct it, and the portion representing a capital improvement special assessment may be treated differently again.
In practice
Real-world examples.
Example
A first-time buyer is approved for $420,000 on a house with no association, then finds the flat she prefers carries a $520 monthly fee. Her approval falls to $333,000, and she has to widen her search rather than raise her offer.
Example
A buy-to-let investor pays $340 a month in HOA fees on a rental flat producing $1,850 in rent. He treats the $4,080 annual fee as a deductible expense, which reduces his taxable rental profit and changes the yield calculation the agent quoted him.
Example
A retired couple in a 60-unit block receive notice that fees will rise from $470 to $610 a month after the association's insurance renewal. The $1,680 annual increase forces them to review their drawdown plan, since it exceeds the inflation assumption they had built in.
Formula
Calculation
Total monthly housing cost = principal and interest + property taxes + insurance + HOA fee
Maximum total debt payment = gross monthly income x lender's debt-to-income limit
A buyer earns $9,000 a month gross. The lender applies a 43% debt-to-income limit and the buyer already pays $600 a month on a car loan and student debt.
Maximum total debt payment = $9,000 x 43% = $3,870
Available for housing = $3,870 - $600 = $3,270
Less HOA fee of $450, property taxes of $400 and insurance of $150
Available for principal and interest = $3,270 - $450 - $400 - $150 = $2,270
At 6% over 30 years, the monthly payment is about $6.00 per $1,000 borrowed, so $2,270 supports a loan of roughly $378,600. If the same buyer bought a comparable property with no HOA fee, the $450 would move into the principal and interest budget, giving $2,720 and a loan of roughly $453,700. The $450 monthly fee therefore costs about $75,100 of borrowing power.
Over a ten-year hold, that same fee costs $450 x 12 x 10 = $54,000 in cash before any increases, and a 4% annual rise would push the tenth-year fee to about $640.Case study
Seen in the real world.
This is an illustrative, fictional example. Kestrel Wharf Management, an invented association running 84 riverside flats, held fees at $420 a month for six years while costs climbed. The board avoided increases because the annual meeting was always difficult, and it balanced the budget each year by drawing on reserves.
By year seven reserves had fallen from $610,000 to $95,000 and the buildings insurance premium had doubled. The board raised fees to $690 a month in a single step, a 64% increase, and levied a $2,800 special assessment per flat to rebuild the reserve. Four sales collapsed within a month of the notice going out.
An independent review concluded that annual increases of about 8% from year one would have reached roughly the same fee level without any special assessment and without the disruption to sales. The illustrative point is that HOA fees are not a price to be defended but a cost to be funded, and delaying the increase made it larger.
Watch out
Common mistakes.
- Treating the HOA fee as optional or negotiable. It is a binding obligation attached to the property, and non-payment can lead to fines, interest and a lien.
- Ignoring the fee when comparing two properties on price alone. A $450 monthly fee is equivalent to roughly $75,000 of extra mortgage at typical rates.
- Assuming a low fee is good news. Chronic under-funding of reserves is the most common reason for large special assessments later.
Questions
People also ask.
Are HOA fees tax deductible?
For an owner-occupier usually not, but a landlord can generally deduct them as an expense against rental income.
Can the association raise the fee without a vote?
Board powers vary; many can approve increases up to a stated percentage, with larger rises requiring a members' vote.
What happens if an owner stops paying?
The association can normally charge interest and costs, restrict access to shared facilities, and ultimately record a lien and pursue enforcement.
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